Retirement ages are going to have to rise. This has been made clear in recent suggestions that the State pension age for men will not only rise from 65 to 66 by 2016, but will also continue to rise by one year in every five, which has had some people frothing at the mouth. However, the acceptance by Government that we should expect to retire later does not seem to have filtered through to discussions on public sector pensions. Here, the talk seems to be of increased contributions to cover the increasing cost of accrual. However, this seems to be an answer to the wrong question. Rather than asking “how can we afford to keep the same retirement age?” we should be asking “what retirement age is appropriate?” – and the answer to this is, as with the State pension age, a higher number than the current one.
An issue with raising the retirement age for public sector pensions is that, for both legal and moral reasons, any rise can apply only to future pension accrual. This could lead to people having slices of pension with different retirement ages, a situation resolved only by adjustments for early or late retirement in respect of part of the pension. Such unavoidable adjustment would not be unique. For example, the sex-equalisation of pensions following the Barber judgement in the early 1990s led to pension scheme members having pre- and post-Barber slices of pension with different retirement ages. However, this was a messy solution adopted in response to a court judgement that affected thousands of pension schemes.
Any work on public sector pensions would benefit from a neater approach. One solution would be to raise the retirement age for all pension, past and future, but to increase the pension already earned to compensate for the fact that it would be paid later. This could be done by awarding added years – a notional increase in past service – based on a members’ current age and the number of years already worked. Doing this would keep the contribution rate the same, and would provide a single retirement age for a pension paid from a single employer. It would even be possible to allow for an increasing retirement age relative to current age, as is being suggests for the State pension.
Of course, it is unfair to impose an increase in retirement age on someone, even if it is accompanied with an increase in the pension paid. An alternative should therefore be offered. This could be the payment of both past and future pension from the same date – the current retirement age – but with an increase in the contribution rate to cover the cost of continued accrual with this retirement age. Out of fairness, the increase in contribution should be set such that it is equivalent on average to the difference in cost arising from the earlier payment of the pension.
Apart from reducing the rate at which pension would be earned – which would simply increase the number of people reliant on State support in retirement – these are the only ways of realistically reducing the burden of public sector pensions. Other suggestions, such as a move to a career average scheme, would have little impact. This would result in pensions being based on the average salary – adjusted for inflation – over an employee’s working life. However, the steady nature of salary increases in the public sector would mean that the impact on costs would be small. Unfortunately pay more or receive later are the only options.